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FrontFour Capital taps out

Also: markets suffer a key technical breakdown on Friday that may presage more selling to come - and maybe even that correction that everyone's been waiting for

When he was younger, Max Fawcett wanted to make a mint in the markets. Now as the managing editor of Alberta Venture he gets to write about them. Close enough, right? He can be reached at mfawcett@albertaventure.com

Jan 28, 2014

by Max Fawcett

Renegade Petroleum might have won the battle, but it has yet to win the war. On Monday, FrontFour Capital – the Connecticut-based firm that’s helmed by Zachary George, former Suncor CEO Rick George’s son – admitted that it didn’t have the votes to proceed with its attempt to appoint their own CEO and substantially alter the company’s strategic direction. A special meeting, to be held today, was cancelled.

But as Thomas Budd, Renegade’s board chair, told the Calgary Herald’s Dan Healing, the aborted proxy contest still cost the company both time and money. “Despite our numerous attempts to offer FrontFour two board seats in order to settle this wasteful diversion of money, time and resources, this proxy battle has unfortunately cost the company in excess of $1 million.” Now, he says, it will proceed with evaluating the “active interest” that stemmed from the strategic review it launched last year, interest that could result in an outright sale of the company.

While we’re not slaves to technical analysis, over at Bloomberg Barry Ritholtz had an interesting piece on a key technical breakdown that took place during Friday’s bloodbath. Thanks to a late-day acceleration of the sell-off, it was a so-called “90/90” day – one where more than 90 per cent of both the volume and the points were down. “When markets experience a bout of intense selling – those trading sessions when 90 percent of the volume is down, and nine out of 10 stocks close lower – it can mark a short-term reversal in a bull run. Typically, it signifies a shift in psychology among larger institutions,” Ritholtz writes. “The motivation for this change is less relevant than the actual swing in buying. Whether it was caused by emerging-market turmoil or fears of a Federal Reserve taper or the expectation that the president will admit in his State of the Union address that he was really born in Kenya is irrelevant. The only thing that matters to this form of analysis is that the 90 percent threshold is met in both volume and advancing-versus-declining issues.”

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This week’s trading – so far, at least – confirms that pattern. “Looking at the past examples of deep 90/90 sell offs, we have seen only modest rebounds followed by more selling after days such as Friday.” Could today’s uptick be just a breather before we see more selling? Ritholtz seems to think so. “So far, the 10 percent correction we discussed is still on track. A short oversold rally doesn’t change the broader picture of a market long overdue for some corrective movement.”

And from the macro perspective, Peter Cecchini, the Global Head of Institutional Equity Derivatives & Macro Strategy at Cantor Fitzgerald, says investors should be prepared for more volatility in 2014 – or, perhaps, a repeat of 2011. Why? It all comes down to tapering. “Really, it’s a simple thesis. It’s accommodation and the growth of the Fed balance sheet that’s been driving markets primarily.” And so, he said on an appearance on BNN earlier today, the reduction in the growth of that balance sheet will have a knock-on effect on markets. “By our estimation, that will lead to quite a bit more equity market volatility this year. Even though taper isn’t tightening, it will lead to a little less of tailwind behind U.S. equity markets than they had in 2013.”

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